What is a Time Draft?

A time draft mandates that payment is due on a readily determinable future date. For example, a bill might be payable 10 days after presentment and acceptance. Time drafts are primarily used in transactions that cross national borders, where the buyer needs time to liquidate purchased goods in order to have sufficient cash to pay the seller. A time draft is also known as a usance draft.

The conditions under which a time draft functions are as follows:

Receiving and paying parties. There must be an issuer that creates the time draft, as well as a payee that is to receive the stipulated funds.
Payment date. There must be a future date on which the stipulated funds will be paid. The payment date can be a fixed date (such as February 15) or specific number of days following acceptance of the draft by the payee (such as 90 days).
Acceptance by payee. The draft becomes binding on the issuer when the payee accepts the draft. This is done by signing the document and writing “Accepted” on it.
Underlying trade. The draft is associated with a trade transaction, where the buyer of goods has the time period indicated on the time draft to sell them, which frees up the cash to transfer funds to the payee on the payment date.

The Difference Between a Time Draft and a Sight Draft

A time draft varies from a sight draft, which requires payment at the time of presentment. Thus, a sight draft requires immediate payment, while a time draft requires a delayed payment.